What is a ‘Financial Crisis’

A financial crisis is a situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution.

BREAKING DOWN ‘Financial Crisis’

A financial crisis can occur as a result of institutions or assets being overvalued, and it can be exacerbated by irrational investor behavior. A rapid string of selloffs can further result in lower asset prices or more savings withdrawals. If left unchecked, the crisis can cause the economy to go into a recession or depression.

How the 2008 Financial Crisis Happened

The 2008 financial crisis was the worst economic disaster since the Great Depression of 1929. The root cause has been traced to no one single event or reason. Rather, it was the result of a sequence of events, each with its own triggering mechanism that led to near collapse of the banking system. It has been argued that the seeds of the crisis were sown as far back as the 1970s with Community Development Act, which forced banks to loosen their credit requirements for lower-income minorities, creating a market for subprime mortgages.

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